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June 22, 2010

Are sin taxes good for a state's health, or bottom line?

When teaching the basics of supply and demand and taxes in my principles of econ classes, I ask the question: Why do governments tax cigarettes, alcohol and gas? Invariably someone answers something along the lines: "To reduce consumption of things that are bad for us?"

"WRONG! You fool!," I scream with a self-satisfying grin and evil cackle.

OK, maybe a little right, but the real reason is that these goods have inelastic demand. That's fancy-speak for saying that consumers don't react much to price changes. If consumers don't react much to price increases, then the government can raise the price through taxes, consumers will still consume roughly the same amount, and government revenues rise. That's right, so-called sin taxes don't reduce the sin, they raise revenues.

The official line is that taxes on tobacco and soda are principally health measures; the extra revenue for the state is but a pleasant side benefit. Sure it is.

No doubt, we would all be better off if no one smoked or consumed junk food and drinks*. Should grocery stores lose income in the process, so be it. But make no mistake: improved health is the side benefit in this situation. The goal is to raise money any way possible so Albany can avoid having to take a deep breath and end its cherished habit of living beyond its means.

If these taxes were really about public health, the politicians would have acted long ago instead of waiting till now, when the state is broke and they are desperate.

*Actually, I have much doubt that we would all be better off. We may be healthier, but personally I am willing to sacrifice a little health every once in a while for a bag of Doritos and a beer or two**.

**By "every once in a while" I mean daily, and by "a beer or two" I mean...

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Are sin taxes good for a state's health, or bottom line?

When teaching the basics of supply and demand and taxes in my principles of econ classes, I ask the question: Why do governments tax cigarettes, alcohol and gas? Invariably someone answers something along the lines: "To reduce consumption of things that are bad for us?"

"WRONG! You fool!," I scream with a self-satisfying grin and evil cackle.

OK, maybe a little right, but the real reason is that these goods have inelastic demand. That's fancy-speak for saying that consumers don't react much to price changes. If consumers don't react much to price increases, then the government can raise the price through taxes, consumers will still consume roughly the same amount, and government revenues rise. That's right, so-called sin taxes don't reduce the sin, they raise revenues.

The official line is that taxes on tobacco and soda are principally health measures; the extra revenue for the state is but a pleasant side benefit. Sure it is.

No doubt, we would all be better off if no one smoked or consumed junk food and drinks*. Should grocery stores lose income in the process, so be it. But make no mistake: improved health is the side benefit in this situation. The goal is to raise money any way possible so Albany can avoid having to take a deep breath and end its cherished habit of living beyond its means.

If these taxes were really about public health, the politicians would have acted long ago instead of waiting till now, when the state is broke and they are desperate.

*Actually, I have much doubt that we would all be better off. We may be healthier, but personally I am willing to sacrifice a little health every once in a while for a bag of Doritos and a beer or two**.

**By "every once in a while" I mean daily, and by "a beer or two" I mean...

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